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Too poor to grow

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  • Lopez, Humberto
  • Serven, Luis

Abstract

Recent theoretical literature has suggested a variety of mechanisms through which poverty may deter growth and become self-perpetuating. A few papers have searched for empirical regularities consistent with those mechanisms – such as aggregate non-convexities and convergence clubs. However, a seemingly basic implication of the theoretical models, namely that countries suffering from higher levels of poverty should grow less rapidly, has remained untested. This paper attempts to fill that gap and provide a direct empirical assessment of the impact of poverty on growth. The paper’s strategy involves including poverty indicators among the explanatory variables in an otherwise standard empirical growth equation. Using a large panel dataset, the authors find that poverty has a negative impact on growth that is significant both statistically and economically. This result is robust to a variety of specification changes, including (i) different poverty lines; (ii) different poverty measures; (iii) different sets of control variables; (iv) different estimation methods; (v) adding inequality as a control variable; and (vi) allowing for nonlinear effects of inequality on growth. The paper also finds evidence that the adverse effect of poverty on growth works through investment: high poverty deters investment, which in turn lowers growth. Further, the data suggest that this mechanism only operates at low levels of financial development, consistent with the predictions of theoretical models that underscore financial market imperfections as a key ingredient of poverty traps.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5012.

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Date of creation: 01 Oct 2009
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Handle: RePEc:wbk:wbrwps:5012

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Keywords: Free Trade; Trade Law; Economic Theory&Research; Trade Policy; Currencies and Exchange Rates;

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References

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Citations

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Cited by:
  1. Martin Ravallion, 2012. "Why Don't We See Poverty Convergence?," American Economic Review, American Economic Association, American Economic Association, vol. 102(1), pages 504-23, February.
  2. Goni, Edwin & Lopez, J. Humberto & Serven, Luis, 2008. "Fiscal redistribution and income inequality in Latin America," Policy Research Working Paper Series 4487, The World Bank.
  3. Hallegatte, Stephane, 2012. "A cost effective solution to reduce disaster losses in developing countries : hydro-meteorological services, early warning, and evacuation," Policy Research Working Paper Series 6058, The World Bank.
  4. Aterido, Reyes & Beck, Thorsten & Iacovone, Leonardo, 2013. "Access to Finance in Sub-Saharan Africa: Is There a Gender Gap?," World Development, Elsevier, Elsevier, vol. 47(C), pages 102-120.
  5. Patrick Honohan & Thorsten Beck, 2007. "Making Finance Work for Africa," World Bank Publications, The World Bank, number 6626, August.
  6. Aterido, Reyes & Beck, Thorsten & Iacovone, Leonardo, 2011. "Gender and finance in Sub-Saharan Africa : are women disadvantaged ?," Policy Research Working Paper Series 5571, The World Bank.
  7. Jensen, Nathan & Valdivia, Corinne, 2010. "Correlation between Access to Capitals and Income in the Bolivian Altiplano," 2010 Annual Meeting, July 25-27, 2010, Denver, Colorado, Agricultural and Applied Economics Association 61517, Agricultural and Applied Economics Association.
  8. Alderman, Harold & Yemtsov, Ruslan, 2012. "Productive role of safety nets : background paper for the World Bank 2012-2022 social protection and labor strategy," Social Protection Discussion Papers 67609, The World Bank.
  9. Loayza, Norman & Rigolini, Jamele & Llorente, Gonzalo, 2012. "Do middle classes bring about institutional reforms?," Economics Letters, Elsevier, Elsevier, vol. 116(3), pages 440-444.

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